This invention relates to display of orders and quotes in electronic markets.
Electronic equity markets, such as The Nasdaq Stock Market® display pre-trade information to all market participants. Such markets often have multiple systems to receive the pre-trade information. One system may be for small orders whereas another may be for larger orders or orders that get executed in different manner, e.g., by negotiation rather than auto execution.
In a market such as Nasdaq small orders are delivered by the Nasdaq Stock Market's Small Order Execution System (“SOES”). The SOES provides a simple and efficient vehicle to execute small agency orders at the so called inside quote, report trades for public dissemination, and send trades to clearing for comparison and settlement. In the SOES system, trading is done automatically and is negotiation-free. In response to the October 1987 market break, SOES was enhanced in several respects to provide individual investors with guaranteed liquidity and assured access to market makers in times of market disruption. In particular, SOES participation was made mandatory for all market makers in Nasdaq national market securities.
An example of another system used to access the same market is the Nasdaq Stock Market's SelectNet, originally referred to as the Order Confirmation Transaction Service (“OCT”). SelectNet provides an alternative to telephone contact among trading desks for negotiating trades. SelectNet is an electronic screen-based order routing system that allows market makers and order-entry firms (collectively referred to as “participants”) to negotiate securities transactions in market securities through computer communications rather than relying on the telephone. Unlike SOES, SelectNet offers the opportunity to negotiate for a larger size or a price superior to the current inside price, i.e., best bid best offer.
SelectNet currently allows subscribers to direct, or “preference” orders to specified market makers or to broadcast orders to all market participants. Although SelectNet is an order delivery service, rather than an order execution service, a preferenced SelectNet order presented to a market maker at its displayed quote generally gives rise to liability under SEC Rule 11Ac1-1 (“Firm Quote Rule”) for the market maker to execute the transaction at that price.
SelectNet is the link to Electronic Communications Networks (“ECNs”). OTC market makers are required to make publicly available any superior prices that the market maker privately quotes through an ECN. A market maker may comply with this requirement by changing its quote to reflect the superior price or, in the alternative, may deliver better priced orders to an ECN provided that the ECN disseminates these priced orders to the public quotation system and provides broker-dealers equivalent access to these orders.